CURRENT PRACTICE WITH REGARD TO SHORT-TERM

INCENTIVE SCHEMES FOR MIDDLE MANAGERS

CHRISILLA GRIGORIADIS

MARK BUSSIN

Department of Industrial Psychology

University of Johannesburg

ABSTRACT

This study aimed to determine what the current practice is with regard to short-

term incentive schemes for middle managers. This was done by means of a

quantitative study through a structured research survey completed by a sample

of forty-eight organisations. The design elements, performance measures, and

payout practices of the various schemes in use were surveyed, as well as the

participants’ view on the perceived effectiveness of their short-term incentive

schemes. Evidence shows that the majority of organisations have a short-term

incentive scheme in place for their middle managers, and that the type of scheme

used in most of the organisations is a performance-related bonus scheme,

introduced mainly to drive business performance and reward superior

performance.

Background to the study

The use of pay-for-performance, and in particular the use of incentive schemes

have increased dramatically since 1987 in Fortune 1000 corporations (Lawler,

2003), and in a recent survey of reward practices conducted by WorldatWork, it

was reported that approximately 66% of companies in the United States use

variable pay beyond their executive levels. This is an increase from 59% in 1995

(Wilson, 2003).

Historically, high-performing employees could expect to receive bigger salary

increases than their lower-performing peers, especially when annual merit

increases were averaging higher as a result of increasing inflation, but today, it

has become increasingly more difficult to differentiate between the salaries of

individual employees based on high or low performance. In order to supplement

these merit increases, many companies have started implementing pay-for-

performance incentive schemes (Orens and Elliot, 2002).

- 1 -

There is thus globally a trend towards implementing performance-based

incentive schemes, and in particular an increase in the use of incentive schemes

for employees other than executives. In South Africa, variable pay and in

particular incentive schemes have been implemented successfully for executives

and sales staff across organisations, whereas most often, middle managers do

not reap the benefits of such incentive programmes.

The focus of this study therefore was to determine what the current practice is

with regard to short-term incentive schemes for middle managers, as very little

empirical research has been done in this regard. Short-term incentive schemes

in particular are defined as incentive schemes where the measurement period is

around one year and payments are in cash e.g. profit share, gain share,

commission and bonus scheme (Bussin, 2003). Commission schemes were,

however, excluded from this study as they are mainly used for sales employees,

and a need existed to determine what the incentive scheme practices are with

regard to non-sales middle management employees.

Middle managers are considered to be those employees at around the Paterson

D-Band level. When looking at a traditional hierarchical organisation, middle

managers are those employees below senior managerial level and above the

supervisory or junior management level. The professional specialists often fall

into this employee category.

Motivation/rationale for the study

There is a lack of empirical research and literature on the problem, and a

pressing need in the market exists for this research. The reasons for focusing on

middle managers are that they are often the group of employees where little

emphasis is placed on the manner in which their rewards are structured. Middle

managers are the future executives of tomorrow’s organisations, and they are the

backbone of any organisation, and it makes sense that they too should bear the

fruit of a successful short-term incentive scheme.

- 2 -2

It is therefore critical that their talent be managed and that they shouldn’t be

leaving an organisation because of their unhappiness with the reward system.

Organisations often invest significant amounts of money in developing their

middle managers, and it makes sense then, that they should try and retain these

managers.

This research has aimed to address this knowledge gap with specific reference

to the South African market.

Literature on short-term incentive schemes

The literature on short-term incentive schemes is contradictory. There are

proponents as well as sceptics to be found in the literature. Research has more

often than not found that incentives do not motivate people or have a significant

positive impact on their performance (Kohn, 1993), but it can be argued that a

lack of sufficient rewards or dissatisfaction with the current reward system does

tend to demotivate people and have a negative effect on their performance

(Thorpe & Homan, 2000). It is thus critical to “get it right” as regards to

incentives, as a shortfall in this area is likely to have negative consequences if

not applied correctly. There is ample evidence though that result-based incentive

schemes, especially at the individual level, can greatly increase company

performance (Gerhart & Rynes, 2003).

There is some research to be found in the literature with regard to the factors or

design principles that need to be taken into consideration when designing and

implementing an incentive scheme. There is, however, substantial literature

available on the dynamics of executive and sales incentive schemes (Gerhart &

Rynes, 2003), and much research has been published on what is considered

best practice with regard to incentive schemes for executives and sales

employees, but very little research has focused on middle managers (Scott;

McMullen; Wallace & Morajda, 2004).

- 3 -3

According to Freher (2002), the annual incentive scheme has the greatest

potential to influence individual behaviour and enhance business results. A

properly designed annual incentive scheme can assist organisations in achieving

the desired performance based on critical tactical success factors. He is also of

the opinion that an individual manager sees selection to an annual incentive

scheme as a key step on his/her career ladder, and that participation in such a

scheme has considerable monetary as well as symbolic value. He emphasises

further though, that a line of sight for inclusion into a management incentive

programme is critical. In other words, participation should only extend to

individuals who can truly influence (directly or as a significant member of a team)

the planned performance measures.

Research done by Döckel, Basson and Coetzee (2006) shows that

compensation has a strong significant relation to organisational commitment –

specifically for high-technology employees. Bloedorn, also (2002) asserts that

incentives can expand the team committed to delivering results and that they can

cause employees, individually and collectively, to focus their attention on the

company’s goals and identify with shareholder interests.

The literature encourages organisations to take eligibility for incentive schemes

deeper down into their organisations (Bloedorn, 2002), but it provides no or very

little guidelines to that effect.

Objectives of the study

The value-add of this research will firstly be theoretical, as it will influence

thinking about short-term incentive schemes, and will build towards a theory or

model with regard to short-term incentives for middle managers. Secondly, the

value of this research will be practical in the sense that the research will highlight

the current practices in short-term incentive schemes, and this will provide

organisations with a way forward with which to implement these schemes at

middle management level.

- 4 -4

It is anticipated that, through this research, organisations will be alerted to what

the factors or design elements are that make up a short-term incentive scheme

for middle managers. It should, however, be pointed out that this research has

identified certain current practice elements, but it is critical that when

organisations design short-term incentive schemes for middle managers that

they customise the incentive scheme to fit their individual business’ needs, which

is what a large organisation did as part of theirbecoming one of the best

companies to work for (Van Dyk & Herholdt, 2004).

RESEARCH DESIGN

Research Approach and Methodology. This was an empirical study. A

quantitative research methodology was followed and the research was

conducted by means of a cross-sectional, explorative survey. Survey research is

a method of quantitative research whereby “a sample of a chosen population can

be studied to discover the relative incidence, distribution, and interrelations of

sociological and psychological variables” (Kerlinger & Lee, 2000, p. 599).

In this research a sample of forty eight organisations was studied with respect to

their short-term incentive schemes for middle management. Survey research is

well suited to a problem such as this, as it is an economical and accurate manner

in which a great deal of information can be gathered from a large population

(Kerlinger & Lee, 2000).

Participants/ respondents. The research questionnaire was sent out to all the

organisations (about five thousand) on the database of a large South African

remuneration consulting firm. The sampling strategy used was random sampling.

“Random sampling is that method of drawing a sample of a population so that

each member of the population has an equal chance of being selected…The

resulting samples are random samples” (Kerlinger & Lee, 2000, p.165).

- 5 -5

Forty-eight organisations participated in this study. The research questionnaires

were completed by the person who is primarily responsible for the remuneration

and reward management function at each participating organisation. These

respondents were identified as Human resources and reward professionals;

CEOs and finance managers. The research questionnaire was completed by

respondents from a variety of industry sectors. The classification and definition of

the industry sectors used were those normally used by the remuneration

consultancy whose database of organisations was surveyed. The industry

sectors of the participating organisations can be seen in Table 1.

Table 1

Participating organisations: industry sector

Industry Sector Percentage of Participants

Producer Services 27%

Transformative 23%

Distributive Services 17%

Other (mostly Information Technology) 13%

Social Services 10%

Extractive 8%

Personal Services 2%

The largest group of the participating organisations is in the producer services

sector, which are typically organisations in banking and financial services;

insurance; real estate; engineering; accounting; consulting; legal services; and

miscellaneous business services.

The workforce size of the various participating organisations can be seen in

Table 2.

- 6 -6

Table 2

Participating organisations: workforce size

Number of Employees Percentage of Participants

Less than 150 17%

150 – 500 25%

501 – 2000 25%

2001 – 10 000 23%

10 001 plus 10%

The range of the workforce size of the participating organisations is quite wide,

as it includes both very large and quite small organisations. In Table 3, the

descriptive statistics relating to the various organisations’ workforce sizes can be

viewed.

Table 3

Participating organisations: workforce size descriptive statistics

Descriptive Statistic Value

Mean 3797.3

Median/ 50th Percentile 1164

Standard Deviation 7445.9

Minimum 32

Maximum 42769

Range 42737

25th Percentile 222.5

75th Percentile 3269

Skewness 3.65

Kurtosis 16.09

Measuring instrument/ methods of data gathering. The measuring instrument

used in this study was a structured research questionnaire. A suitable

questionnaire was developed and then piloted with a small sample of reward

experts and academics before being sent out to the research participants.

- 7 -7

Correlation tables were included in the questionnaires to participants. It was

made clear that the category of staff this research applied to was middle

managers.

The questionnaire explored short-term incentive schemes in use by organisations

at middle management level with respect to certain design elements,

performance measures, payout practices and perceived effectiveness of these

schemes. The questionnaires were sent out electronically, and participants were

thus able to complete these questionnaires electronically.

It has been found that the reliability of factual items, such as age and income in a

questionnaire is high, whereas the reliability of attitudinal responses is harder to

determine (Kerlinger & Lee, 2000). The questionnaire that was sent out thus

focused on the hard facts, i.e. what short-term incentive schemes are

implemented and how they are implemented at middle management level.

In addition to these factual items, perceived-effectiveness questions were built

into the questionnaire. A Likert scale was used for these questions. A Likert scale

is also known as a summative rating scale that requires the respondent to

respond to several statements that are clearly favourable or unfavourable

concerning the topic being measured (Elmes, Kantowitz & Roediger III, 1999).

Open-ended questions were also included in the questionnaire to generate

authentic responses from participants. Data from the questionnaires was further

supplemented by follow-up telephonic interviews where necessary, to enhance

the quality of the data collected.

Procedure. The questionnaires were sent out late June 2006, and the

participants had three weeks in which to return the questionnaires. The deadline

for submission of questionnaires was, however, extended until late July, to

encourage more organisations to complete the survey.

- 8 -8

Thereafter, the responses from the questionnaire were analysed to determine

what the current practices are with regard to short-term incentive schemes for

middle managers.

Statistical analysis/ treatment of the data. The response data from the

questionnaires circulated was the source of data analysis, as well as any follow-

up telephonic interviews. Descriptive statistics are the primary method by which

the factual data is portrayed. This reflects the research results visually, and is a

suitable method of data analysis, as the sample of research participants is

limited.

A secondary analysis was done of the participating organisations’ size and

industry sector, to determine whether there was in fact a correlation between the

participating organisations’ biographical data and the various elements

researched in the survey. Correlational research enables the strength and

direction of relations amongst variables to be determined. (Elmes, Kantowitz &

Roediger III, 1999). No significant trends were, however, found in the

participating organisations’ biographical data and the other elements researched

in this survey.

Where there was an opportunity to provide a free-text response, these responses

were analysed qualitatively in order to give meaning to the data and supplement

the descriptive statistics.

RESULTS

The survey explored all the short-term incentive schemes currently in use by the

participating organisations with the exception of commission schemes, as these

mostly apply to sales employees, and this research specifically aimed to explore

short-term incentive schemes in use for non-sales middle management

employees.

- 9 -9

The specific areas researched were the design and measurement elements

involved in short-term incentive schemes, the payout practices in these schemes,

as well as the effectiveness of these schemes as perceived by the respondents.

Of the forty eight organisations surveyed, 77% indicated that they had a short-

term incentive scheme in place for their middle managers, while 23% of the

respondents had no such scheme in place. The organisations that did not have

a short-term incentive scheme in place were questioned about their reasons for

not having such a scheme. Table 4 reflects their responses.

Table 4

Reasons why participating organisations do not have a short-term

incentive scheme in place for middle managers

Reasons for not introducing a scheme Percentage

The organisation has considered it, and we will start

implementing short-term incentive schemes for middle managers

in the near future

55%

Other (more information is required on incentive schemes, and

there are limited resources to implement these schemes)

27%

There is no need for short-term incentive schemes for middle

managers in our organisation

9%

The organisation uses other reward/ recognition schemes to

incentivise our middle managers

9%

More than half the organisations have considered implementing short-term

incentive schemes and will start implementing them for middle managers in the

near future. Similarly, the organisations that do have a short-term incentive

scheme in place for their middle managers were asked to indicate whether a

number of possible reasons for introducing the scheme was a reason that they

considered to introduce the scheme. Their responses are reflected in Table 5.

- 10 -10

Table 5

Reasons for introducing a short-term incentive scheme for middle

managers

Reasons for introducing the STI Percentage

‘Yes’

Percentage

‘No’

To drive business performance 97.3% 2.7%

To reward superior performance 91.9% 8.10%

To improve employee motivation 78.4% 21.6%

To increase retention 70.3% 29.7%

To drive business strategy 64.9% 35.1%

To communicate goals and objectives 44.4% 55.6%

To share wealth 43.2% 56.8%

To address a particular business issue 29.7% 70.3%

The two main reasons for introducing a short-term incentive scheme at middle

management level are to drive business performance, and to reward superior

performance.

Of the 77% of participants that have a short-term incentive scheme in place, the

majority (89%) of organisations have only one short-term incentive scheme in

place for their middle managers, while only 11% have two schemes in place. As

regards the type of scheme the organisation used, the results are reflected in

Table 6.

Table 6

Types of short-term incentive scheme used by participating organisations

Type of scheme in use Percentage of organisations using

the particular short-term incentive

scheme

Bonus Scheme 84%

Profit-sharing Scheme 14%

Gain-sharing Scheme 3%

- 11 -11

Other STI 8%

Only the data for the participants using bonus schemes will be reported in this

article. There are very few organisations using profit-sharing (14%); gain-sharing

(3%), and other short-term incentive schemes (8%).

Certain design elements of short-term incentive schemes were surveyed. These

included eligibility to participate in the scheme; which person(s) is(are)

responsible for the design, implementation, communication, administration, and

review of the scheme, as well as the length of time that the scheme has been in

existence.

Eligibility

In most cases, all the middle managers in the organisations were eligible to

participate in the scheme. Twenty two per cent of organisations involved the

eligible employees in the design and development of the scheme, and where the

eligible employees fell under a bargaining unit, only 14% of organisations

involved key stakeholders from the bargaining unit in the development and

design of the scheme. Where eligible employees were, however, involved, this

happened mostly through a committee or forum where some of the eligible

employees would be present.

Responsibilities with regard to short-term incentive schemes

Participating organisations were questioned as to who the primary person(s) are

who is(are) responsible for the design; initial implementation; communication;

administration and reviewing of their short-term incentive schemes. The results

as displayed in Table 7 are applicable to bonus schemes only, as this is the

scheme which 84% of the organisations have in place in their organisations.

- 12 -12

Table 7

Responsible person(s) for the various design elements in a bonus scheme

Bonus Scheme design

elements

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Development and design 22% 13% - - 9% 27% 16% 13%

Initial implementation 34% 28% 13% 6% 3% - 16% -

Communication 22% 34% 16% 3% - 13% 12% -

Day-to-day Administration 22% 46% 13% 13% - - 6% -

Reviewing the scheme 37% 16% - 3% 3% 19% 6% 16%

From Table 7, it is clear that many of the responsibilities relating to the design

elements of short-term incentives are largely Human Resources and

Remuneration responsibilities.

Forty seven per cent of organisations review their bonus scheme once a year

and 44% review the scheme as and when required. Fifty nine per cent of

respondents have had the bonus schemes in their organisations in existence for

longer than three years.

Performance measures

Sixty per cent of responding organisations have between three and five

performance criteria that need to be met first before a payout can be made from

the bonus scheme. They have indicated that the nature of these performance

criteria can be quantitative, qualitative, financial, or non-financial, although in the

majority of cases a financial measurement involved is involved.

- 13 -13

In 59% of the cases, these performance criteria are set by the top management

of the organisation, followed by the departmental manager in conjunction with the

individual employee (22%). The primary method by which compliance with these

performance criteria is measured isby means of a performance management

system (69%).

In 88% of the organisations, a certain performance criterion needs to be met first

before the bonus scheme can pay out. This is usually the financial performance

of the company, followed by the requirement that the individual employee and the

department must achieve certain performance goals.

Payouts on the scheme

The payouts in the bonus scheme are funded from the organisation budget.

Payout on the scheme is, however, not guaranteed as certain performance

measures need to be achieved first. Sixty nine per cent of organisations using a

bonus scheme have indicated that these schemes pay out once a year.

Participants were questioned about the various proportions that certain

performance measures contribute towards a 100% payout on the bonus scheme.

Due to the wide range of responses (0-100% for each group of performance

measures), the responses were grouped together, and the results of the majority

of the respondents are indicated in Table 8. The results should, however, be

interpreted with care.

Table 8

Proportional contribution of performance measures towards payout on a

bonus scheme

Type of performance measures Proportional contribution towards a

100% payout on the scheme

Group wide/ organisation measures 20%

Business unit/ division measures 30%

Individual performance measures 50%

- 14 -14

There is thus a heavier proportional contribution of individual performance

measures, than group wide or organisation measures at middle management

level.

Seventy five per cent of organisations cap their payout in the bonus scheme at a

certain percentage or amount. Participants were requested to supply actual

payout figures for 2004, 2005 and 2006. Again, the range of responses was very

wide (from 0% - 200% of the individual employee’s guaranteed annual package).

The mean payouts were calculated, excluding the outliers. The results are

depicted in Table 9, and should again be interpreted with care.

Table 9

Average payouts of bonus schemes

2004 2005 2006

Mean payout per year as a % of total

guaranteed package

14% 11% 12%

Perceived effectiveness dimensions

The participants were requested to rate twenty perceived effectiveness

dimensions with regard to the short-term incentive schemes in their organisations

on a Likert scale that ranged from strongly disagree (1), to strongly agree (5).

They were requested to respond as to how they currently perceive the scheme.

The mean responses were also calculated.

A reliability statistic of Chronbach’s Alpha was calculated at 0.901. Chronbach’s

Alpha is used to assess the internal consistency reliability of an instrument that

has different scoring and response scales, such as a Likert Scale (Kerlinger &

Lee, 2000). The instrument (twenty questions) used here to assess the perceived

effectiveness of short-term incentive schemes thus has a high internal

consistency. The instrument is reliable, and the items can be considered

homogeneous.

- 15 -15

The actual percentage of the participants’ responses to each item on the scale is

reflected in Table 10, and is sorted according to the highest mean responses.

Table 10

Perceived effectiveness of short-term incentive schemes

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There is enough funding available in the

company to ensure payout in the

scheme

4.06 2.8% 5.6% 8.3% 50.0% 33.3%

The scheme has a positive influence on

individual performance targets and

goals

3.92 2.8% 8.3% 5.6% 61.1% 22.2%

The scheme has a positive influence on

company/organisation performance

targets and goals

3.89 2.8% 5.6% 8.3% 66.7% 16.7%

The scheme drives positive behavioural

performance3.61 2.8% 8.3% 22.2% 58.3% 8.3%

The scheme results in an increase in

employee morale over the long term (4

months +)

3.61 2.8% 8.3% 22.2% 58.3% 8.3%

The scheme is effective in motivating

participating employees to reach the

required performance measures

3.61 2.8% 8.3% 22.2% 58.3% 8.3%

The participating employees buy- into

the scheme3.61 2.8% 8.3% 22.2% 58.3% 8.3%

The current performance management

system supports the short-term

incentive scheme3.61 5.6% 22.2% 2.8% 44.4% 25.0%

- 16 -16

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Employees feel that they can achieve

the performance measures that have

been set

3.5 5.6% 8.3% 19.4% 63.9% 2.8%

The short-term incentive scheme is able

to differentiate significantly between

poor performing and high-performing

employees

3.5 8.3% 19.4% 13.9% 30.6% 27.8%

The participating employees have no

disputes with regard to the scheme3.44 0.0% 19.4% 25.0% 47.2% 8.3%

The employees who participate in the

scheme experience the scheme

positively

3.36 0.0% 22.2% 27.8% 41.7% 8.3%

The scheme results in an increase in

employee morale over the short term

(1- 3 months)

3.36 0.0% 22.2% 27.8% 41.7% 8.3%

The participating employees perceive

the scheme as fair3.36 0.0% 22.2% 27.8% 41.7% 8.3%

The scheme results in increased

teamwork amongst participating

employees

3.36 0.0% 16.7% 36.1% 41.7% 5.6%

It is relatively easy to set performance

measures for the scheme3.33 2.8% 16.7% 33.3% 38.9% 8.3%

The short-term incentive scheme is able

to create sufficient wealth for high

performing employees

3.22 13.9% 16.7% 16.7% 38.9% 13.9%

The scheme serves as an effective

retention tool 3.14 5.6% 22.2% 30.6% 36.1% 5.6%

- 17 -17

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The scheme attracts high talent for the

organisation3.08 5.6% 22.2% 38.9% 25.0% 8.3%

Participation in the scheme leads to

unhealthy competition among the

participating employees

2.22 22.2% 44.4% 22.2% 11.1% 0.0%

Common difficulties experienced with the schemes, and advice to

organisations about to embark on the implementation of short-term

incentive schemes.

Participants were asked to indicate what difficulties they were currently

experiencing with their short-term incentive schemes in their respective

organisations. Their responses were free-text to encourage authentic responses.

Some of the responses are summarised below in Table 11.

Table 11

Common difficulties experienced with short term incentive schemes

Common difficulties experienced with short-term incentive schemes by

participating organisations

Benchmarking and obtaining accurate competitor information

Developing and determining objective performance criteria or measures, and

having an objective performance management system

Determining the weighting of company; team and the individual performance

measures

The limited funds available, that in turn prohibit the payment of a bonus

Even though bonuses aren’t guaranteed, employees start to see them as a 13th

cheque (something they are entitled to) – they therefore do not want to have to

perform to earn a bonus

It is very hard to give the “bad news” when there is no bonus

- 18 -18

Participating employees perceive the scheme as being subjective and unfair, and

they don’t trust the scheme

The scheme is often poorly communicated

Line managers don’t understand the scheme

Finally, participants were questioned as to what they would recommend to

organisations about to embark on a short-term incentive scheme. Some of their

responses are summarised in Table 12.

Table 12

Advice to organisations about to embark on a short-term incentive scheme

Advice to organisations about to embark on a short-term incentive scheme

Do a proper benchmarking and analysis

Obtain board and CEO buy-in (also line manager buy-in)

Consultation with participating employees (focus groups) to get their buy-in

Ensure that a proper performance management system is in place and that it is

applied consistently

Have clear rules that are properly communicated and consistently applied

Get the performance measures right and hold firm onto them. Don’t keep moving

the goalposts. The scheme will lose its credibility

Communicate performance regularly during the assessment period

Be clear about what behaviours you are incentivising, as you may get what you

pay for

Keep it simple. Use the scheme as a reward system and not as a system to

manage the business

Tailor-make incentives (allow for flexibility and choice)

Be transparent in the allocation process

Consider having a moderation process in place

Track consistency and fairness of the system

- 19 -19

The participating organisations seem to experience common areas of difficulties

when implementing short-term incentive schemes and their advice to other

organisations concern the prevention of some of the difficulties that they

themselves have experienced.

DISCUSSION

This study aimed to determine the short-term incentive practices at middle

management level with regard to the type of schemes used, their design

elements, performance measures and payout practices. Their perceived

effectiveness by the respondents was also measured.

The move towards implementing short-term incentive schemes for middle

managers is gaining popularity as 77% of the organisations surveyed already

had at least one such scheme in place. Of the other 23% of the organisations

that do not have a short-term incentive scheme in place, 55% cited that they

have considered it and that they will start implementing short-term incentive

schemes in the near future.

The two main reasons for introducing short-term incentive schemes for middle

management, as reflected in Table 5, are to drive business performance (97%)

and to reward superior performance (91.9%). A total of 78.4% of organisations

also introduced the scheme to improve employee motivation. This is a large and

convincing number of participants.

A recent similar study conducted in the United Kingdom reports that only 31% of

respondents indicated that they introduced the scheme to “motivate & incentivise

staff” (Armstrong & Thompson, 2006, p.26). In another survey of a similar nature

conducted in the United States of America, the primary objective of the variable

pay programme was to improve organisation or team financial performance (65%

of respondents) (Scott; Mcmullan; Wallace and Moradja, 2004).

- 20 -20

It appears as though we are being influenced more by the American school of

thought than by the British.

Even though the literature has on numerous occasions indicated that it is critical

to the success of the scheme to involve eligible employees in the design of the

scheme (Thorpe & Homan, 2000) and to increase ownership and acceptance of

the scheme (Armstrong, 2002), only 22% of the participants in this survey involve

their eligible employees in the development and design of the scheme. This lack

of involvement may lead to a lack of trust between management and employees,

and Gerhart & Rynes (2003) indicate that these schemes may well be

undermined as a result of this lack of trust.

This lack of involvement, however, does not seem to be a factor of major concern

to the participants, as 50% of participants believe that the participating

employees experience the scheme positively; 52% believe that participating

employees perceive the scheme as being fair, 63.9% believe that the

participating employees buy into the scheme; and 55.5% believe that the

participating employees have no disputes with regard to the scheme.

This research found that a convincing number of respondents participate in

bonus schemes as their scheme of choice (84%), and that they also believe this

is the most effective scheme for middle managers.

As Table 7 indicates, the function responsible for the design, implementation,

communication and administration of bonus schemes is still largely a human

resources and remuneration function. Very few respondents indicated that line

management was responsible for the implementation (13%), communication

(16%) and day-to-day administration (13%) of the bonus scheme, yet they also

indicated that a common difficulty experienced with the scheme is that line

managers do not understand the scheme.

- 21 -21

This, according to Beer and Canon (2004) can result in significant problems with

implementation of the scheme that is often insufficiently acknowledged by

practitioners. Organisations often underestimate the time and effort that need to

be consumed by managers to implement and administer a new variable pay

system (Cox, 2005).

Armstrong (2002) is of the opinion that an important element in the ideal

performance-related pay model is that the responsibility and ‘ownership’ of the

system should be assigned to line managers. Organisations should therefore

consider educating their line managers to be able to understand these schemes

and in turn to be able to set effective, clear and fair performance measures, and

as a result, they must be able to differentiate successfully between the high- and

poor-performing employees reporting into them.

Performance measures and the performance management system

Even though the most preferred performance measures are financial in nature,

the participants indicated that they use quantitative, qualitative, financial, or non-

financial performance measures. A combination of these is ideal for middle

managers, as their ability to influence financial targets is more limited than that of

the executives in their organisations. If the measures are perceived to be too far

removed for individual employees to influence, the scheme’s effectiveness is

questionable (Gerhart & Rynes, 2003).

As a result, middle managers and professionals are often also measured by

“softer” and more qualitative performance measures (Thorpe & Homan, 2000).

Nevertheless, it is critical that incentive scheme performance measures shouldn’t

be too complex or difficult for the participants to understand and influence

(Pfeffer and Sutton, 2006), and that a line-of-sight relationship must exist

between the participants and the scheme’s performance measures (Freher,

2002).

- 22 -22

The literature is divided as regards the number of performance measures that

should be used in a bonus scheme, but it is interesting to find that 60% of

responding organisations in this study have between three and five performance

measures that need to be achieved first before a payout can be made from the

bonus scheme. This is a good number of measures to use. Not too many not to

be able to achieve the targets, and not too few to make the achievement of

targets too easy.

Participants responded mostly neutral as to the ease of setting accurate

performance measures. However, 66.6% believe that the participating

employees feel that they can achieve the performance measures that have been

set. This is, however, the opinion of the respondents in this survey, and not that

of the participating employees themselves.

The primary method by which these performance measures are measured is by

means of a performance management system (69%). Reliable performance data

is a “must have” for variable pay programmes to work (Orens and Elliott, 2002).

Care should be taken during the performance assessment, as not to use

subjectivity (Thorpe & Homan, 2000). A total of 69.4% of respondents in the

survey believe that the current performance management system supports the

short-term incentive scheme.

Payouts in the bonus scheme

In 88% of the organisations, a certain performance hurdle or moderating factor

needs to be achieved first before the bonus scheme can pay out. This is usually

the financial performance of the company, followed by the individual employee

and the department achieving certain performance goals.

Slightly more than half (58.4%) of respondents believe that the current incentive

scheme is able to differentiate significantly between high and low performers.

- 23 -23

They are, however, divided in response to the question of whether the scheme is

able to create sufficient wealth for high-performing employees. Rynes, Gerhart

and Minette (2004) are of the opinion that the aspect of pay that will most directly

motivate performance will be the extent to which pay is contingent on

performance. i.e.) if there is no real differentiation in pay-for-performance

between high and low performers, there will be no real differentiation in their

performance. The converse is also true. When pay is sharply differentiated on

the basis of performance, pay is a very effective motivator indeed.

Freher (2002) emphasises that the scheme should have a proper balance among

corporate, business unit, and individual performance. The majority of participants

in this research use three different groups of performance measures. It seems as

if the most common proportion of these measures for middle managers are: 50%

individual performance measures; 30% business unit/ division measures; and

20% group wide/ organisation measures.

This is also indicative of the line-of-sight principle, in that middle managers have

more influence over their own and their department’s performance than the

company’s performance. It makes sense though that the company performance

measure also counts towards the bonus payout, as the company needs to be

performing before a performance bonus can be paid out in any event.

The influence of short-term incentive schemes on performance, motivation

and retention of middle managers

In a study of the top factors driving changes to remuneration policy decisions; it

was found that “retention of key staff” was one of the top five drivers (Bussin &

Huysamen, 2004). A change in the short-term incentive policy in private;

parastatal and public sector organisations was one of the top five changes in

order of extent of change that changed most in the remuneration policy. The

short-term incentive policy was also one of the areas that had the greatest

positive impact in private organisations (Bussin & Huysamen, 2004).

- 24 -24

A total of 83.3% of respondents in this survey believe that the short-term

incentive scheme has a positive influence on individual performance, and 83.4%

believe the scheme will positively influence company performance. This

corresponds to Gerhart & Rynes’ (2003) suggestion that there is ample evidence

that results-based incentive plans can greatly increase performance. Incentives

can only spark motivation if employees have enough information to work

effectively and if other organisational systems and technologies are not main

roadblocks to performance (Pfeffer and Sutton, 2006).

Seventy eight per cent of respondents in the survey introduced a short-term

incentive scheme to improve employee motivation and 72.2 % believe that the

scheme actually motivates the employees to reach the required performance

standards.

Participants are divided in their beliefs as to whether the scheme acts as an

effective retention tool or whether the scheme is able to attract high talent to the

organisation.

A model of short-term incentive schemes in South Africa

An objective of this study was to build towards a model of current practice with

regard to short-term incentive schemes for middle managers, to be able to assist

remuneration practitioners in organisations. To this effect, a summary of the

results of this study is indicated in Table 13 for short-term incentive schemes in

general, and in Table 14 for bonus schemes in particular.

- 25 -25

Table 13

Common design elements regarding short-term incentive schemes for

middle managers in South Africa

Design element Summary of survey responses

The prevalence of using short-term

incentive schemes for middle

managers

77% of organisations surveyed use a

short-term incentive scheme for their

middle managers

Reasons for introducing a short-term

incentive scheme

To drive business performance, and to

reward superior performance

Eligibility to participate in the schemes All employees at middle management

level

Involvement of participating employees Very little or none at all

Most commonly used scheme Bonus scheme

As 84% of the participating organisations use a bonus scheme for their middle

managers, the common design elements regarding bonus schemes are

summarised in Table 14.

Table 14

Common design elements regarding bonus schemes for middle managers

in South Africa

Design Element Survey Responses Summary

Responsibility for development and

design of bonus scheme

CEO and remuneration manager

Responsibility for initial implementation

of bonus scheme

Remuneration manager and human

resources

Responsibility for communicating the

scheme

Human resources and the

remuneration manager

Responsibility for day-to-day

administration of scheme

Human resources

Responsibility for reviewing the Remuneration manager

- 26 -26

scheme

Design Element Survey responses summary

How regularly the scheme needs to be

reviewed

Once a year, or when required

The number of performance measures

in the bonus scheme

3 - 5

Responsibility for setting the main

performance measures

Top management, followed by the

individual employee in conjunction with

department and line management

How these performance measures are

measured

Performance management system

Funding of the scheme Budgeted for

The use of triggers or moderators

before a payout can be made

Company, division and individual

targets need to be achieved

Frequency of payouts Once a year

The percentage that each group of

performance measures should count

towards payout

Company (20%); division or business

unit (30%); individual (50%)

Validity and reliability of the study

Although this study surveyed a relatively small sample of organisations, the size

and sectors of the organisations surveyed are quite broad. The results are able

to provide the reader with a perspective on what the current practices are with

regard to short-term incentive schemes for middle managers. This is the first

empirical study of this nature in South Africa, and the reliability of the results can

be increased by replicating the study with a larger sample of organisations.

Limitations of this research

This study aimed to determine the practices with regard to short-term incentive

schemes for middle managers. The middle manager category is quite broad, and

- 27 -27

with hindsight, it would have been more valuable had the individual sub-grade

categories been surveyed.

It was hoped that the different organisation sectors and organisation sizes would

have significantly different practices with regard to short-term incentive schemes.

However, no significant differences were found. If a larger sample were

surveyed, these differences might have come to the fore.

Value-add of this study

This study has added significant value to the practice and perceptions of short-

term incentive schemes for middle managers. Readers have an idea as to how

other professionals in charge of these schemes experience their effectiveness,

and they now have a guide with regard to the design elements/ features that are

inherent in short-term incentive schemes. Consulting organisations have

conducted some surveys to determine certain elements of short-term incentive

schemes. However, these were never empirical studies, and they didn’t focus on

middle managers specifically. It is hoped that this research has added to the

broad body of knowledge about remuneration and reward management in South

Africa.

Suggestions for future research

In this research, the participating organisations were asked to rate their

perceived effectiveness of the schemes. It would be ideal if this research could

be done where the participating employees themselves are asked to rate their

perceived effectiveness of the scheme. Armstrong (2002) also recommends that

organisations have the effectiveness of their performance-related pay

programmes evaluated by the people participating in the scheme. He advises,

however, that the organisation should be prepared to take action based on these

results.

Another area of research that may be considered is a more detailed analysis of

middle management. This study focused on middle managers in general, but a

- 28 -28

more detailed breakdown of the Paterson D-Band into D Lower and D Upper may

provide a different set of results for each band.

The development of an effectiveness measure would also be very useful, where

all the relevant effectiveness dimensions are surveyed, and some sort of

standardised scoring mechanism can be used.

Conclusion

Short-term incentive schemes for middle managers is a vehicle that is mostly

used to increase and reward superior performance. Only some of the

participating organisations experience these schemes as effective in achieving

the aims of the schemes. The most popular scheme to use at middle

management level is a bonus scheme where there is a combination of individual;

team and organisation-wide performance measures that contribute towards a

payout on the scheme. The participating organisations in this research, however,

still experience some difficulties when implementing these schemes. South

African organisations should in future allocate significant time and effort to the

planning and design of these schemes, and ensure that the majority of

employees and line managers buy into the scheme and perceive the scheme as

fair. The buy-in from both employees and line managers is critical if these

schemes are going to succeed into future, and have the effect desired by

organisations.

- 29 -29

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